Autarky Is Not the Solution, It’s the Problem

Interview with Gustavo Vega Cánovas, Secretary General of El Colegio de México

By: Guillermo Máynez Gil

Autarky Is Not the Solution, It’s the Problem
 The dilemma between globalization or autarky, so in vogue in times of the Great Depression of 1929, seems to be—again—at the center of the debate. The unexpected events of 2020 threaten to inaugurate a new cycle of closure that, with a precise use of history, Gustavo Vega argues is not the solution to current world problems. He further explains the importance of the successful renegotiation of the North American trade agreement, especially for the difficult times ahead.

Globalization and free trade seem to retreat amidst repeated questioning regarding how their benefits are distributed. Is it temporary or a real change of era?

There’s a big discussion around these topics. First, it would seem there are historical cycles that teach us lessons. In the 1930s, for example, the closing off with which nations reacted to the 1929 Great Depression not only aggravated the crisis, but also led to the rise of totalitarianisms that ultimately led to World War II. The institutional and production structure built at the end of this war gave way to decades of sustained growth, but it plunged into crisis with the Great Recession of 2008-2009. This time around, governments didn’t immediately close their borders; however, over the years, the perception that Asian models, Chinese in particular, were an alternative to the broader liberalization of western nations was spreading. This model gives the State greater participation in the economy, and keeps a central role in the selective and planned promotion of growth.

 

At the heart of the contemporary debate is the idea that, although globalization has benefited humanity in an aggregate manner, it has done so with a very notable increase in inequality. It is very likely that these distributional gaps harbor the reason behind Donald Trump’s election and Brexit. We are perhaps on the verge of a new era in which strong states with populist governments will compete for world supremacy in an environment of less open borders.

 

The trade war between China and the United States is framed in this scenario; the eastern nation seems to be searching for the technological forefront, something the North American country sees as a potential threat to its national security. Amid this dispute, China is accused of using anti-competitive practices, including the violation of intellectual property rights.



Global production and trade dynamics seem to be organized, increasingly so, in regional blocs. What future awaits multilateral organizations like the WTO?

To begin with, it faces an eventual loss of protagonism. On the one hand, “hard power” is re-emerging in the United States in response to the model of liberalization and provision of public goods that previously prevailed. We must remember the support given to Japan and Korea to block communist China in the eighties by the United States. Among many other factors, this support increased the United States’ trade deficit. In order to face the inconformity of those that thought this strategy encouraged excessive liberalization, a selective protectionism was opted for, which to a large extent, was also practiced by the Asian countries themselves. The confrontation between the United States and China was similar to that between the North American power and Japan in the eighties, a country that, incidentally, was also accused of piracy and other unfair practices.

 

The collapse of the Soviet bloc in the 1990s gave way to a new round of trade liberalization in which a democratizing trend in Latin America encouraged the incorporation of the different countries of the region, first to the GATT and then to the WTO. China also joined this multilateral body at the beginning of this century. As I already mentioned, the 2009 crisis slowed down this opening cycle, and it is legitimate to ask ourselves to what extent this new stage is similar to that of the eighties.

 

Today, Europe and countries like Australia, Canada, Mexico, New Zealand, among others, repeatedly call for the strengthening of the WTO. The United States is not enthusiastic about the idea; it thinks some emerging powers get significant benefits from trade liberalization without making equivalent commitments. Thus, there seems to be a cyclical conflict between liberalization and protectionism. For the time being, we don’t foresee that countries such as China and India will be willing to assume their corresponding responsibilities according to their new stage of development,  and two of the main principles of the WTO, namely no discrimination and reciprocity. China is promoting its own strategy with the Belt and Path Initiative, which aims to form an economic bloc based on its own centralized and hierarchical model.

 


GUSTAVO VEGA CÁNOVAS

 

NAFTA played a prominent role in the formation of large regional blocs. What are your thoughts on that agreement and its impact on the economies of North America?

Given that the GATT Uruguay Round was not moving forward, the United States sought to shape its own regional model (like the European Union had done). Canada was its first natural ally in this regard, both because of its close commercial link with the United States market, and because of its special agreement in the automotive sector. In Mexico, due to the 1980s crisis, it was thought that integrating the international economy was necessary to stimulate the growth of the economy. A first approach with the European Union was rejected; instead, the NAFTA idea came about. Although there was an intense debate about Mexico’s ability to compete in the North American market, the agreement finally materialized; it was very novel, for example, in the chapter on the agricultural sector or in the protection of foreign investment. For its part, the United States was concerned about possible unfair competition from Mexico in areas such as labor and the environment, which ended with the signing of parallel agreements.

 

NAFTA became a model for other agreements negotiated by the United States; in addition, it included points that were not in the Uruguay Round, such as services and intellectual property, which countries like India or Brazil refused to accept. On this and other issues, NAFTA can still be considered a role model.

 

It was, in general, a successful agreement. More specifically, it placed Mexico on the path to a profound economic transformation that, over the years, allowed it to become a manufacturing and exporting power. The Agreement was fundamental in quickly overcoming the 1995 Mexican crisis and represented a regional solution to the 1997 Asian crisis. However, it was also general opinion that it fell short. It has been blamed for problems outside the agreement, when in reality it did not include public policies that promoted education, infrastructure and development in the southern regions of the country.

 

In your opinion, what were the reasons behind President Trump promoting the NAFTA renegotiation? 

Trump got to the White House convinced that what he believed were flaws in the previous trade policy were responsible for the huge trade deficit; the loss of jobs, mainly in labor-intensive activities, and the less dynamic economic expansion. He was not the only one. Democrats had their own concerns, like the long-standing complaints that Mexico attracted investment based on lax environmental and labor policies, among others. What was the difference in the two election campaigns? Trump did see an opportunity with this point, while Democrats did not give it enough thought.

 

Do you think Trump achieved his goals?

He thinks he has. For example, he calculates—and he is somewhat right—that Mexico will not be able to comply with the new automotive sector wage rule. Based on this calculation, he is confident that investments will return to the United States. However, organizations such as the International Trade Commission (ITC) foresee that this will not happen: instead of jobs returning, U.S. automobile imports will go up—except for some models—because tariffs are very low. In any case, greater domestic production will translate into higher prices for consumers.

 

What Trump did achieve was to insert a clause that forbids USMCA members from separately negotiating a free trade agreement with non-market economies. Which, for all intents and purposes, bans Mexico and Canada from negotiating a free trade agreement with China. In exchange, Mexico and Canada are exempt from the application of rule 232 of the Trade Expansion Act, which confers powers on the president to impose extraordinary tariffs on automotive products due to national interest.

 

What are your thoughts on this renegotiation, particularly for Mexico? How does it benefit and harm us?   

The main benefit is that it sustains access to the North American market. The USMCA, in essence, ratifies NAFTA’s fundamental structure. The success of the Mexican and Canadian negotiators lied in translating all progress made in terms of liberalization and access to markets into the USMCA. Furthermore, in the case of agriculture—a key sector—commercial exchange is strengthened and encouraged by guaranteeing access to products based on new technologies. The chapter on financial services expands coverage and guarantees practically the same conditions of access to the different types of financial services between Mexico and the United States. The renewal and extension of the original deal was also agreed on issues such as e-commerce, cybersecurity, trade facilitation, transparency and regulatory practices, state-owned companies, the environment, small and medium-sized companies, competition, anti-corruption, dispute resolution and exchange rate management.

 

Likewise, Mexico managed to deactivate the most dangerous proposals, such as seasonality for agricultural exports. Almost everything stayed the same and the uncertainty was eliminated. Moreover, Trump can sell the USMCA to his electorate as a triumph for their country. The fact that trade liberalization with Mexico now has greater support in the United States should not be underestimated. The final result is positive.

 

As to costs, I think they focus on the automotive sector and the workplace. Everything indicates that the new provisions for the automotive sector will increase the production costs of automobiles and trucks in North America.

 

Regarding workforce, Mexico accepted new provisions and mechanisms to ensure that the Mexican government and companies comply with the commitments stipulated in the labor chapter of the USMCA. A provision of special concern is the one that modifies the way violation of the labor agreement is proved, by establishing that upon filing a complaint, the company or investment from the complaining party will be presumed to be affected, unless the defendant proves otherwise.

 

This provision could increase the number of lawsuits regarding violations of labor standards in companies or workplaces in the manufacturing or service sectors established in Mexico. If it were to be used maliciously, it could discourage investment in our country. However, it is worth noting that Mexico included a provision against frivolous or notoriously unfounded litigations.

 

How has the trade war between the United States and China influenced this whole process?

The clause forbidding separate trade agreements with China responds precisely to the United States government’s perception that the irruption of Chinese supplies in many Mexican manufactured goods violates the rules of origin. It seeks to avoid this and other issues that may be derived from separate agreements. Until now, Mexico has benefited from this war by taking over the empty space that Chinese imports have left behind due to the higher tariff burden imposed by the U.S. government. In this respect, Mexico seems to be yet another opponent of China in the battle for the U.S. market. While the clause that restricts the signing of free trade agreements with the “non-market economy” limits our future relationship with the Asian giant, the truth is that we have never contemplated signing such a deal. Incidentally, the USMCA does not prevent us from establishing less ambitious cooperation agreements with China, but they must capitalize on the existing complementarities between both countries.

 

What can we expect from globalization in upcoming decades?

Despite coronavirus, I hope the world will understand that closing off is not the solution to our problems.